Washington, DC, January 13, 2015 --  

Cheap oil is bad news for authoritarian regimes. Neighboring countries might not fare better.

The steep drop in oil prices over the last six months has shaken up geopolitics on many fronts. Nowhere is this more true in Venezuela, where a populist regime facing default is burning through its $22 billion of remaining foreign currency reserves¹ as inflation and food shortages ravage the country. With oil prices below $50 per barrel vs. over $100 per barrel this time last year, and oil the overwhelming source of foreign currency, the Venezuelan people will see very hard times in months to come.

Given the authoritarian nature of the Venezuelan regime, this is not entirely bad news. President Nicolas Maduro, who took over after the death of Hugo Chavez, has continued his policies of stifling dissent by shutting down independent television broadcasts and intimidating opposition politicians. The regime has built its credibility entirely on using oil revenue during good times to rain money on its supporters. By ignoring investment on industries that could help Venezuela ride though declining oil prices, its people are now facing a steeply declining standard of living.

Indeed, high oil prices over the past decade enabled bad behavior the world over. In Russia, the world's largest oil producer, oil money has entrenched the Putin regime by allowing it to enrich loyal cronies and engage in a military modernization program that reversed the decay of the old Soviet forces. Oil enabled Russia to purchase new equipment allowing it to invade two neighboring countries and intimidate several others.

Other examples of bad behavior (like Saudi Arabia's and Iran's export of extremist islamic ideologies, Iraq's suppression of minorities, and Uzbekistan and Turkmenistan's stifling of dissent) are unchanged since the last era of low oil prices ending in the early 2000s. But the impetus for reform has undoubtedly been muted by a decade of lucrative oil and natural gas revenues.

Bad times probably won't immediately improve things — distressed regimes may lash out at both internal and external enemies. But there is no doubt that the same bad behavior business as usual is no longer an option.

Many analysts point to weak economies in Europe and East Asia to explain the drop in fossil fuel prices. A more critical factor has been the rise in exploitation of non-traditional oil and gas deposits. Production from Canada's tar sands and America's shale deposits have created a new safety valve on oil and gas markets. While these deposits represent a very small amount of fossil fuel reserves, and they are costly to mine, their mere existence is critical.

Economists describe petroleum markets as inelastic. Since people can't easily cut back on consumption as prices rise, even a small change in supply or demand can cause huge swings in the price of energy. This works both ways — with a little more demand, prices rise sharply, and with a little more supply, prices drop sharply. This is exactly the effect that the tar sands and shale deposits have had.

In general, this is great news for people who live in net petroleum consuming countries, and for people who don't like the power that expensive oil and gas gives to the world's dictators. But it isn't all good news.

Consider Ukraine, which has long suffered under the boot of Moscow. Russia supplies nearly all of its natural gas, has annexed its province of Crimea and invaded its eastern provinces. The rise of hydraulic fracking has raised the prospects of alternate gas suppliers in the European Union or the United States. But with the drop in prices means that the traditional suppliers (like Russia), who can cheaply suck petroleum out of the ground with a straw, will be the ones supplying the gas until prices rise again. That's bad news for Ukrainians, who are just a Russian spigot-turn away from freezing in their own homes.

Related Web Columns:

A Weak Case Against Filthy Oil, October 18, 2011

Higher Prices Now!
Weaning Consumers From Cheap Oil, June 24, 2008

The End of Oil, June 13, 2006

Notes:

1. Moody's, Moody's Downgrades Venezuela's Rating to Caa3 from Caa1; Outlook Stable, January 13, 2015